Idea Brunch with Steven Wood of GreenWood Investors

Steven Wood shares his love of founder-led businesses, prediction for Peloton, and his top ideas

Welcome to Sunday’s Idea Brunch, a weekly interview series with underfollowed investors and emerging managers. We are very excited to interview Steven Wood!

Steven is the founder and Chief Investment Officer of GreenWood Investors, a global concentrated investment firm with an affinity for founder-led or family-owned businesses. Before founding GreenWood in 2010, Steven was an analyst at Carr Securities, Aslan Capital, and RBC Capital Markets. Steven also serves on the board of CTT Correios de Portugal, Portugal’s publicly traded postal operator.

Steven, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background, why you decided to launch GreenWood Investors, and your love for founder-led businesses?

Thanks for having me on Sunday’s Idea Brunch Edwin!

I launched GreenWood while working with the gentleman who became a pivotal mentor to me – Wally Carucci. The future of his broker-dealer business was obvious, so I started GreenWood and gave him the maximum I could without regulating his activities (24.9%). From Wally, I learned contrarian value investing which is the approach I use with GreenWood today. Given how much of the outcome of tougher, lower-priced situations is determined by the managers and the boards overseeing those companies, we naturally migrated towards founder and owner-led businesses. For them, failure is not an option. They think about the problems on Saturday night, or at 3am on Monday morning. They can’t stop thinking about solving those problems, which are often the very reasons why their business valuations are in the gutter.

And if I just go a bit further – there are terrific managers, like Dave Cote (the chairman of Vertiv, which we own), who turned around Honeywell despite the heavy skepticism against him at the time he took the helm. He was passed over by Jack Welch to run GE, who instead chose… Jeff Immelt. In the very excellent Lessons from the Titans, Scott Davis wrote that Cote was Honeywell’s board’s fifth choice for CEO. And while he wasn’t a founder or a massive owner in the company, he instilled an owner-oriented culture in the company and transformed it into an enviable business… all while Immelt managed GE almost exclusively to continue beating quarterly guidance. And it’s really a perfect analogy in the difference between Founders & Guiders (the title of a white paper I’ll be releasing soon). Founders focus on building and Guiders focus on “beating the quarter.” 

Finding more Dave Cotes in the world is much harder than finding founder or owner-led businesses, but it is often far more rewarding – as it was in the case of Sergio Marchionne of Fiat.

Unlike many investors, you are very open in giving interviews, publishing interesting research on your website, and sharing ideas with your 11,000+ followers on Twitter. What are the benefits you’ve seen from sharing your ideas publicly and is there any content you are particularly proud of?

We keep most of what we write to only our investors that have skin in the game. But I very much love public collaboration, particularly on ideas where we can’t figure out timing or the behavioral narrative. I really love the critical feedback – even if it’s usually conveyed in a pretty personal and harsh manner. This is a humbling business, and we need to always remain humble. But as David Goggins wrote in Can’t Hurt Me, bullies tell us something we need to hear, just not in the most delicate way. 

Collaborating on Twitter, something we’re trying to do more of, has been especially helpful in finding the other side of the trade. That’s incredibly important for any investor to understand.

But by far, the highest value add comes from our investors. We publish on every name in our portfolio, and we feel it not only helps our process but keeps us firmly aligned with those who are most impacted by our investment decisions. We’re very fortunate to have great investors who provide feedback, and importantly very often add incremental industry insight we might have been missing.

One particularly useful example of this was an investor of ours who sent us a case study on Kaspi. He saw that with its delivery, payments, banking, and marketplace services, CTT Correios de Portugal (CTT) has many of the same components the Kaspi has. We immediately engaged on it, and just this week brought it to a discussion with executives at CTT to understand where we can credibly build a similarly cohesive consumer experience.

As Gary Klein wrote in Seeing What Others Don’t, the most common way insights arise is by using different perspectives to draw connections between two completely different examples. So our goal with the research and the collaboration is to maximize our ability to generate insights.

In the case of CTT, these insights can be directly applied to the evolving business model and management. And as this very investor wrote to me after I thanked him for the idea, he responded “But ideas are cheap, execution is gold.”

Amen.

In April 2020, you published a bullish research report on Peloton. You highlighted “the luxury services model it is building” and predicted that the pandemic would be “a likely positive for the company” despite sending the stock down at the time. Since your report, the stock has gone from $30 to $160 and now back to $30. What happened and what’s your opinion on the company today?

How much time do we have?

We still own it. We sold a significant portion of our stock as it surpassed $100 / share (of course not top-ticking it), but we have held it this entire time. The original thesis of an extremely happy and growing customer base has held true and remains true today. Net Promoter Scores (NPS) remain exceptionally high, but in this case, its customers could actually be loving them to death.

A lesson that has come from Peloton is that when a management team optimizes their company for one specific stakeholder, in this case the customer, to the exclusion of everything else – they often create distorted outcomes. Founder and owner-led businesses do have happier customers, more engaged employees, and faster-growing companies, but they don’t optimize for only one stakeholder. And they very rarely focus on the shareholder above all else. They pay less in dividends and repurchase less stock. But still outperform indices over 6% per year.

During the peak Covid-related demand Peloton experienced, its customer satisfaction was hit hard as order-to-delivery times were extended and more people wanted into the ecosystem. The company spared literally no expense or investment to increase capacity to shorten these delivery times. In doing so, it made strategic capital allocation mistakes during a period of temporary excess demand (which, of course, has abated).

Despite being founder-led, its managers don’t behave like the typical founder. If a management team has hired McKinsey to help them manage their business, they don’t understand their business well enough to run it. I say that with multiple McKinsey consultants as our investors – and I think they would all agree with that. So management has made serious errors in how they have managed their business – again myopically focused only on the consumer.

So why do we hold it today? Those investment mistakes (PreCor acquisition and the Ohio production facility) are largely sunk costs. Those sunk costs will enable them to continue working on lowering the price points of their equipment, which is key to building its high-value subscription base (with very low customer churn). We believe the price of the stock is barely above the run-off valuation of this subscriber base (which now is between $25-30 / share, depending on how well they manage content expenses in a declining world).

When we bought AAPL in 2012, we had the same thesis – that the price of the company was valuing its loyal iPhone base (and its subsequent upgrades) very close to the run-off levels. As we foreshadowed in the original Peloton note we put out nearly two years ago, the “iPhone 5” moment is here – except it’s on a much larger base of users. The valuation is here, and while management has clearly made strategic errors managing through Covid, the strength of the ecosystem remains very strong. Churn is low, satisfaction is high, and new customers cohorts are spending more time and money in the ecosystem than earlier cohorts.

And most importantly, while bears point to more used bikes being offered on eBay – that is literally the key to their thesis demise. The certified pre-owned (CPO) program, which we hope launches soon for $999 for the basic bike, will be able to access the largest part of the target market. We have run our own surveys of consumers, and those suggest that demand elasticity is significant once the company approaches the $65/ month all-in price point, made possible by a CPO bike sold for $999. To put it into perspective, the most recent price reduction in the bike tripled the possible audience by price point, but a CPO bike at $999 would increase the addressable market by over 17x.

So while the market is well prepared for bad news in the near term, the sunk costs plus increased used bike availability is the next layer to the story. The risk-reward is incredibly attractive today, given shares are pricing in a complete run-off. The brand remains resilient and customer satisfaction remains (too) high.

What are two or three interesting ideas on your radar now?

First: CTT - Correios De Portugal (Lisbon: CTT — EUR622 million), where we are a constructivist shareholder focused on ensuring that we finish the playbook we set out to achieve. I’ve not been able to write publicly about that because it would be awkward having a board member publish research on the company, but we think the year is going to be a pivotal conclusion to many of the actions we set out to achieve, of course, partnered with the new CEO who took the helm in mid-2019.

But even further than that, I’m currently engaging with him and his world-class team to ensure that CTT’s market narrative in a year’s time is even more exciting than the year in front of us.  As I suggested with the Kaspi example beforehand, the company has significant competitive advantages and tools which none of its peers possess. It is seeking to power the e-commerce engine of Portugal, and possibly Spain, and has a very long runway for growth ahead. Take, as an example, a large and well-known e-commerce company. Our market intelligence suggests that it sells 10x per capita more in Spain than in Portugal. We think that’s a fantastic opportunity to improve the customer experience and compel Portugal to embrace these cheaper and more convenient digital channels for commerce.

The company is already growing faster than its peers, many of whom have higher valuations. And so I’m very focused on maintaining that industry-leading growth rate by having a more virtuous business model than the competitive landscape. Those efforts are largely focused on getting e-commerce to scale in the country. Even a business as poorly run as the USPS has captured two-thirds of all e-commerce volumes in the US. We think we can do better by having excellent customer satisfaction and high quality of service.

Second: A second area where we are focused and actively buying this week, are a couple of digital advertising-powered businesses. This is not a trend that is ebbing despite the pandemic becoming endemic. Many have owned these trends via Facebook and Google, and those companies have had best-in-class management teams executing on that opportunity.

We’ve invested in the industry via S4 Capital (London: SFOR — GBP2.75 billion), run by Sir Martin Sorrell, Twitter (NYSE: TWTR — $28.2 billion), which has also round-tripped back to its pre-Covid levels (just slightly more quietly than Peloton), as well as a new purchase for us, Digital Turbine (NASDAQ: APPS — $3.87 billion). They’ve all seen pronounced volatility recently — but the year ahead will be pivotal for all three.